TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION

Fraud and Abuse Are Addressed in the Indian Tribal
Sector, but Performance Objectives and Measures Are Needed to Assess Program
Effectiveness

January 28, 2013

Reference Number: 2013-10-018

This report has cleared the Treasury Inspector
General for Tax Administration disclosure review process and information
determined to be restricted from public release has been redacted from this
document.

FRAUD AND ABUSE ARE ADDRESSED IN THE INDIAN TRIBAL
SECTOR, BUT PERFORMANCE OBJECTIVES AND MEASURES ARE NEEDED TO ASSESS PROGRAM
EFFECTIVENESS

Highlights

Final
Report issued on January 28, 2013

Highlights of Reference Number: 2013-10-018 to the Internal
Revenue Service Acting Commissioner for the Tax Exempt and Government Entities
Division.

IMPACT ON TAXPAYERS

The
Indian Tribal Governments (ITG) office established the Abuse Detection and
Prevention Team (ADAPT) to address potential fraud and abuse in the Indian
tribal sector; however, specific performance objectives and measures are needed.
Without performance objectives and measures, ITG office management cannot objectively
determine that taxpayer funds expended on the ADAPT provide a good return on
investment.

WHY TIGTA DID THE AUDIT

This review was initiated as part of TIGTA’s Fiscal Year 2012
Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives. The overall objective of this review was to determine
whether the ITG office is taking action and measuring its accomplishments to
stem the growth of fraud and abuse in the Indian tribal sector.

WHAT TIGTA FOUND

Although
the ITG office established the ADAPT in Fiscal Year 2004 with the broad goal of
stemming the growth of fraud and abuse in the Indian tribal sector, it has not developed specific performance objectives
and measures. As a result, TIGTA could not determine if the ADAPT is
effectively combating fraud and abuse in the Indian tribal sector. Setting specific measurable performance objectives would
allow ADAPT management and staff to identify strategies for what they want
to achieve in the short and long term and provide assurance that taxpayer funds
expended on the ADAPT provide a good return on investment.

While
specific objectives and measures have not been developed, TIGTA found evidence
that the ADAPT is actively identifying and addressing allegations of potential
fraud and abuse by tribes and tribal members to meet its broad goal. Since
Fiscal Year 2008, ADAPT examiners have investigated and referred eight
potential fraud cases involving 10 entities to the National Fraud Office
for further investigation (of which four were later referred to and accepted by
Criminal Investigation). Also, ADAPT examiners have assessed tax, interest,
penalty, and restitution amounts against Indian tribal entities and individuals
totaling more than $205 million (of which approximately $75 million has been
collected).

In
addition, the ITG office has made several improvements to the ADAPT since our
last report regarding the Tax Exempt and Government Entities Division’s fraud
program. For example, ITG office management improved the ADAPT by: 1)
encouraging referrals of potential fraud and abuse, 2) formalizing
examination approval procedures, 3) providing forensic accounting and
fraud training to all ADAPT examiners, 4) increasing coordination with other
stakeholders, and 5) assigning an experienced fraud coordinator to monitor
and assist in the development of cases.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the Director, ITG, develop specific performance objectives and measures
in order to better assess ADAPT performance.In
their response to the report, IRS management agreed with the recommendation and
plans to review performance objectives and associated measures in other IRS
fraud-related programs to determine whether, and at what level, similar
standards can be implemented by the ADAPT. To the degree appropriate, the IRS
plans to implement such standards.

January 28, 2013

MEMORANDUM FOR ACTING COMMISSIONER, TAX
EXEMPT AND GOVERNMENT ENTITIES DIVISION

FROM:(for)Michael
E. McKenney /s/ Nancy A. Nakamura

Acting
Deputy Inspector General for Audit

SUBJECT:Final
Audit Report – Fraud and Abuse Are Addressed in the Indian Tribal Sector, but Performance
Objectives and Measures Are Needed to Assess Program Effectiveness (Audit # 201210018)

This report presents the results of our review on whether
the Indian Tribal Governments office is taking
action and measuring its accomplishments to stem the growth of fraud and abuse
in the Indian tribal sector. This review was included in our Fiscal Year 2012
Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.

Management’s complete response to the draft report is
included as Appendix IV.

Copies of
this report are also being sent to the IRS managers affected by the report
recommendations. If you have any questions, please contact me or Gregory D.
Kutz, Assistant Inspector General for Audit (Management Services and Exempt
Organizations).

Executive Order 13175[1] requires Federal agencies to maintain a government‑to‑government
relationship with tribes, respect Indian tribal self‑government and
sovereignty,[2]honor
tribal treaty and other rights, and strive to meet the responsibilities that
arise from the unique legal relationship between the Federal Government and
Indian tribal governments. Within the Internal Revenue Service (IRS), the Indian
Tribal Governments (ITG) office[3]is
responsible for all Federal tax issues[4]related
to the 566 Federally recognized Indian tribes. The ITG office’s mission is to
help Indian tribes understand and comply with applicable tax laws and to
protect the public interest by applying the tax law with integrity and fairness
to all. According to the IRS, the ITG office accomplishes its mission through
a balanced approach of outreach, education, compliance checks,[5] and examinations conducted to determine Federal tax
liabilities and filing requirements.

To carry out its responsibilities, the ITG office has
established seven field groups. Five of these groups
provide primary front‑line service and are aligned to respect tribal
affiliations wherever possible. These field groups consist of tribal
government specialists who work in locations near the seats of tribal
governments and address issues and provide guidance unique to the Indian tribal
sector, e.g., issues relating to tribal governments as employers, per
capita distributions[6]to tribal members, and the
establishment of governmental programs, trusts, and businesses. The ITG office
also established two field groups, collectively known as the Abuse Detection
and Prevention Team (ADAPT) to address abuses and schemes that cause financial
risk to the tribes and their tribal members.

According to ITG office management, effective interactions
with sovereign tribal nations require knowledge of Federal Indian law and an
awareness of unique tribal histories as well as an awareness that some tribes
hold the view that they are not subject to any Federal tax law. This
view, combined with the growth in tribal economies,[7]increases the risk that
unscrupulous individuals can gain a foothold for illegal or unethical
activities, including tax schemes, in the Indian tribal sector.

The ITG office established the ADAPT in
Fiscal Year (FY)[8]2004[9]to work issues where tax
schemes or abuses[10] affect multiple ITG office field group areas or
involve extensive interactions with enforcement functions inside or outside the
IRS. The ADAPT is comprised of ITG office specialists (hereafter referred to
as examiners) experienced in the detection of fraud and abuse.
ADAPT examiners generally do not have access to information for
proactively identifying indications of the existence of fraud and abuse.
Therefore, ADAPT examiners rely on referrals from individuals, other law
enforcement officials, news articles, and other sources, including examinations
of the books and records of Indian tribal entities, to detect indications of
the existence of fraud and abuse.

Tax schemes may occur without the direct knowledge of a tribe, without
an understanding of the consequences by a tribe, or with full involvement of a
tribe. Many schemes result in income for Indian tribal members who may not be
aware the schemes are illegal or unethical. The following are examples of
schemes to avoid payment of tax:

·An Indian tribe may agree to claim ownership of a nontribal
individual’s business for a fee. The nontribal individual retains the
profit and uses the nontaxable status of the tribe to avoid paying income
taxes.

·An Indian tribal leader hires a company to provide services to
the tribe and the tribe pays an inflated price to the company for services
performed. However, part of the payment is then remitted back to a tribal
leader, who does not claim it as income on his or her personal tax return,
thereby diverting Indian tribal funds for personal use and avoiding income tax.

·An Indian tribe makes taxable per capita distributions of tribal
funds to tribal members but does not report the distribution to the IRS in
accordance with IRS reporting requirements. As a result, tribal members
receiving the distribution may not report the distribution on their personal
income tax return, thereby not complying with tax laws and not paying tax on
the distributed funds.

The ITG office’s fraud efforts are conducted in conjunction
with the National Fraud Program, which is established within the Small
Business/Self‑Employed Division. If indications of criminal fraud are
identified by ITG office employees, the National Fraud Office provides guidance
and refers cases to IRS Criminal Investigation for potential criminal
prosecution.

This review was performed at the Tax Exempt and Government
Entities Division ITG offices in San Bernardino, California; Albuquerque, New
Mexico; Oklahoma City, Oklahoma; and Portland, Oregon, during the period November
2011 through September 2012. We conducted this performance audit in accordance
with generally accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on our
audit objective. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objective. Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I. Major contributors to the report are listed in Appendix II.

ITG office management established the ADAPT with the broad
goal of stemming the growth of fraud and abuse in the Indian tribal sector;
however, it has not developed specific performance objectives and measures. As
a result, we could not determine if the ADAPT is effectively combating fraud
and abuse in the Indian tribal sector. While specific objectives and measures
have not been developed, the ADAPT is actively identifying and addressing potential
fraud and abuse to meet its broad goal. In addition, the ITG office has made
several improvements to the ADAPT since our FY 2003 report regarding the Tax
Exempt and Government Entities Division’s fraud program.[11]

The Government Performance and Results Act of 1993[12]requires agencies to set
program goals and measure program performance against those goals. The
guidelines are intended to increase agency accountability and improve the
quality and delivery of Government services through goal setting, customer
satisfaction, and results measurement.

ADAPT management established a broad goal but also stated
that establishing specific performance objectives and measures is challenging. For
example, ITG office management stated they were concerned about setting
specific goals because the IRS Restructuring and Reform Act of 1998[13]prohibits Records of Tax
Enforcement Results (number of cases closed, dollars assessed, etc.)
from being used to set performance goals or to evaluate individual ADAPT examiners.[14] In addition, ITG office
management stated that the size or population of fraud and abuse in the Indian
tribal sector is unknown, making it difficult to set objective goals or measure
how well the ITG office is addressing fraud and abuse overall. In addition,
the ITG office cannot solely control the process of identifying and
addressing fraud and abuse issues because it depends, in part, on the efforts
of other agencies or offices.[15]

Developing goals and measures would allow
ADAPT management and staff to focus on what they would like to achieve in the
short and long term.

Although establishing performance objectives and measures
can be difficult for a fraud program, establishing specific performance
objectives would provide a better understanding of what the ADAPT is striving
to accomplish and would provide a means for establishing methods to measure
progress toward meeting short-term and long-term performance objectives. In
addition, we determined that there is a knowledge base the ADAPT can draw upon.
Based on our research, other IRS fraud‑related programs, including IRS
Criminal Investigation and the Small Business/Self-Employed Division National
Fraud Program, have established objectives and measures regarding enforcement, customer
satisfaction, examination timeliness, increased fraud and abuse outreach
activities, the level of support and guidance provided to address issues, and
support provided to other offices for case development. Setting similar
performance objectives and developing methods of evaluating program success
will provide valuable information for determining resources that should be
applied to the ADAPT to prevent revenue loss to the Federal Government through
fraud and abusive tax schemes. It may also provide increased enforcement and
restitution assessments and assurance that taxpayer funds expended on the ADAPT
provide a good return on investment.

Recommendation

Recommendation
1: The Director, ITG, should develop
specific performance objectives for the ADAPT, along with associated measures,
to better assess how effectively the program is addressing fraud and abuse in
the Indian tribal sector.

Management’s
Response: IRS management agreed with this recommendation. The ITG
office will review the performance objectives and associated measures in other
IRS fraud-related programs to determine whether, and at what level,
similar standards can be implemented by the ADAPT. To the degree appropriate, the
ITG office will then implement such standards.

The ITG office has had significant fraud and abuse accomplishments
compared to when we first reviewed fraud efforts in FY 2003. At that time, the
ITG office generally had not developed a program to combat fraud and abuse;
rather, it focused its resources on assisting customers to correct
noncompliance through customer education and outreach programs.

Since FY 2003, ITG office management has developed a fraud
and abuse program through establishment of the ADAPT. Although ADAPTresults
are not tracked[16]for the purpose of
performance measurement, we identified evidence of the following achievements
since FY 2008.

·The ADAPT is actively examining allegations of Indian tribes
and tribal members potentially involved in fraudulent or abusive activities. From
FY 2008 through FY 2011, the ADAPT completed examinations of 95 Indian tribal
entities and 203 tribal members (related to 68 (12 percent) of 566 Federally
recognized Indian tribes) due to indications of potential fraud or abuse.[17] Due to the fraud and abuse
identified in the tribal sector, a second group of examiners was added to the ADAPT
in June 2009. Figure 1 shows the significant increase in the number of
examinations of tax modules[18]closed after addition of the
second group.

At the close of
our audit, the ADAPT had open examinations on 42 individual and tribal entities
(141 tax modules) related to potential fraud and abuse schemes. In addition,
other cases were awaiting assignment to ADAPT examiners for examination or suspended
pending settlement of criminal charges, grand jury action, or the results of examiners
working with Criminal Investigation on other cases.

·The ADAPT has assessed a significant amount of taxes,
penalties, and interest as a result of examinations. From discussions with
ADAPT management and through analysis, we determined that since FY 2008, tax,
interest, penalty, and restitution assessments were made against Indian tribal
entities and individuals totaling more than $205 million.[19]
Of this amount, the IRS has collected approximately $75 million. The
remaining $130 million is either in Appeals[20]
or awaiting adjudication through the courts. For example, in April 2012, a
former tribal council leader pled guilty and agreed to pay more than $5 million
for distributing tribal funds to himself and family members without reporting
it as income for tax purposes.

In April 2012, a former Indian tribal
council leader pled guilty and agreed to pay more than $5 million for
distributing tribal funds to himself and family members without reporting it as
income for tax purposes.

·The ADAPT referred potential fraudulent activities to Criminal
Investigation for potential prosecution. Between FYs 2004 and 2007,[21]the
ITG office referred 10 cases (involving 28 entities) that were accepted by the
National Fraud Officefor further development. Four of the 10
cases (19 entities) were later accepted by Criminal Investigation for further
investigation. From October 2007 through January 2012, the ITG office
referred eight cases (involving 10 entities) to the National Fraud Office
for further development. Four of the eight cases (involving four entities) were
referred to and accepted by Criminal Investigation for further investigation.
For the remaining four cases, the National Fraud Office took no action on two cases,
asserted a civil penalty on one case, and Criminal Investigation declined one
case.

We reviewed actions
taken by ITG office management since FY 2008 and determined that a number of
changes have been made to improve the ability to identify and address Indian tribal
tax fraud. For example, ITG office management improved the ADAPT by: 1) encouraging
referrals of potential fraud and abuse, 2) formalizing examination
approval procedures, 3) providing forensic accounting and fraud training
to all ADAPT examiners, 4) increasing coordination with other
stakeholders, and 5) assigning an experienced fraud coordinator to monitor
and assist in the development of cases.

Presentations were
given to encourage referrals of potential fraud and abuse

In a prior audit,[22]we determined that the ADAPT made eight outreach presentations
(averaged four per year) during FY 2006 and FY 2007 at Indian gaming conferences.
Since October 2007, the ADAPT has made 24 outreach presentations (averaged
six per year) in an effort to deter fraud and abuse by creating a greater awareness
of tax code violations, improving gaming cooperation in investigations of
financial crimes, and encouraging referrals when warranted.[23] These presentations are
made at Indian gaming meetings such as the National Indian Gaming Association
and to Federal agencies including the
National Indian Gaming Commission and the Departments of Justice, the Interior,
and the Treasury.

The ITG office developed and
provided training to all of its ADAPT examiners to increase skills for
identifying and addressing Indian tribal fraud and abuse.

Examination
approval procedures were formalized

Case building procedures
were in place in the ADAPT prior to FY 2007 to provide assurance that only
cases meeting ADAPT criteria were selected for examination and to provide
enough information for ADAPT examiners to begin the examination efficiently.
However, in FY 2009, a process was formalized requiring approval of all
referrals[24] by the Director, Field Operations, or
the Director, ITG, prior to assignment to an ADAPT examiner. This enhancement provides
increased assurance that the specialized skills of ADAPT examiners are not used
to conduct general examinations when higher profile fraud and abuse cases more
suited to their skills are available. For our audit period, we determined that
all cases in ADAPT examination inventory met ADAPT examination criteria.

ADAPT examiners were
trained to increase skills in identifying and addressing fraud and abuse

Prior to FY 2008, ITG office management sent several ADAPT examiners
to formal fraud training, including forensic accounting and expert witness
courses. Since then, ADAPT management developed their own forensic fraud
training material tailored to Indian tribal issues and provided training to all
ADAPT staff in March and September 2009. In June 2011, additional training on
the indicators of fraud, preparing criminal referrals, developing and asserting
the civil fraud penalty,[25]joint investigations with
other agencies, and other topics were provided to ADAPT examiners.

In addition, ADAPT management includes information on
known schemes during training for ITG office and ADAPT examiners.
Training helps ADAPT examiners sharpen their skills so they can effectively
identify and address fraud and abuse in the Indian tribal sector.

Stakeholders were
provided information on the ADAPT to improve communications and working
relationships

To enhance compliance, the ADAPT must work well with the
National Fraud Program and Criminal Investigation. It is important that these
stakeholders understand the types of fraud and abuse that can occur and be made
aware of information on new schemes as they appear in the Indian tribal
sector. Since FY 2008, ITG office management provided the following
presentations:

·In September 2010 and July 2011, the ADAPT Fraud Coordinator
developed and presented training classes to National Fraud Program officials to
help them better understand fraud and abuse issues that occur within the Indian
tribal sector.

·In August 2011, the ADAPT Fraud Coordinator developed and made a
presentation to a Criminal Investigation Gaming Symposium. The presentation
included information on the ITG office and the ADAPT, the ITG office customer
base, fraud and abuse issues that occur within the Indian tribal sector, and
ITG office fraud development procedures.

·In November 2011, ADAPT management met with Criminal
Investigation representatives to identify ways to improve communication
regarding fraud and abuse within the Indian tribal sector. This resulted in
the preparation of a “Frequently Asked Questions” document involving Indian
tribes for use by Criminal Investigation special agents.

ADAPT monitoring reports
are prepared more frequently, and an experienced coordinator was assigned to
assist examiners and coordinate with stakeholders

ADAPT management used ad hoc status reports prior to FY 2008
to capture information on ADAPT open examinations with sensitive issues, examinations
receiving media attention or involving litigation, and cases being worked with
the National Fraud Program or sent to Criminal Investigation for potential
prosecution. These reports help ITG office management monitor fraud and abuse
examinations at various stages and identify those needing special attention.
However, the reports are now prepared on a bimonthly basis to ensure the Tax
Exempt and Government Entities Division Commissioner and others are aware of
important issues affecting the ITG office, including issues that may receive
media attention.

In addition, in August 2010 a new ITG office Fraud
Coordinator was assigned with more than 15 years of experience in the
IRS’s Special Enforcement Program[26]working fraud and abuse
cases. The new coordinator provides experience working with IRS Criminal
Investigation and IRS Chief Counsel to improve casework in preparation for
potential litigation. In addition, the coordinator serves as a central point
of contact for all ADAPT cases involving potential civil or criminal matters; assists
ADAPT examiners on examinations with indications of fraud; monitors cases
referred to the National Fraud Program for potential civil or criminal action; participates
in monthly conference calls with other Tax Exempt and Government Entities
Division fraud coordinators and representatives from the Small Business/Self-Employed Division National Fraud
Program; and attends quarterly meetings with IRS Chief Counsel, National Fraud
Program, and Criminal Investigation representatives. Having an experienced fraud
coordinator who meets with other IRS stakeholders helps provide assurance
that Indian tribal fraud and abuse issues are raised to other IRS stakeholders
and the ADAPT is aware of fraud and abuse trends identified in other parts of
the IRS.

Our overall objective was to determine whether the ITG
office is taking action and measuring its accomplishments to stem the growth of
fraud and abuse in the Indian tribal sector. To accomplish this objective, we:

I.Determined whether ITG office management established performance
objectives and measured the impact of ADAPT results on program goals.

A.Determined
whether program goals had been clearly defined and documented according to the
Government Performance and Results Act of 1993[27]
and other performance standards.

B.Identified the
process to assess the impact of the use of ADAPT staff since FY[28]2008 to stem the growth
of fraudulent and abusive activities in the Indian tribal sector.

C.Determined
whether ADAPT management developed a process to track the number of cases that
resulted in civil penalties, additional tax assessments, referrals to the Small Business/Self-Employed Division fraud technical
advisors for further or joint investigation, and referrals to Criminal
Investigation, the Federal Bureau of Investigation, or other law enforcement
agencies for criminal prosecution.

D.Identified other
processes used by ADAPT management to assess its impact to stem the growth of
fraudulent and abusive activities in the Indian tribal sector.

E.Evaluated
whether ITG office management had set program goals and measured program
performance against those goals to stem the growth of fraudulent and abusive
activity in the Indian tribal sector.

II.Identified actions taken by the ADAPT to stem the growth of fraudulent
and abusive activities in the Indian tribal sector since FY 2008.

A.Determined whether
ITG office management established processes for encouraging referrals from
internal and external sources that relate to ADAPT goals.

B.Determined
whether ADAPT management established procedures for screening and
classifying referrals received from internal and external sources and only
accepting those meeting the goals of the program.

C.Evaluated
examination inventory for all employees assigned to the ADAPT and determined
whether all cases assigned to ADAPT examiners met program acceptance criteria.

D.Determined whether
the ADAPT coordinated with Criminal Investigation, the Small Business/Self-Employed
Division, or any other agency or professional organization to stem the growth
of abusive activities or fraud.

Internal
controls methodology

Internal controls relate to management’s plans, methods, and
procedures used to meet their mission, goals, and objectives. Internal
controls include the processes and procedures for planning, organizing,
directing, and controlling program operations. They include the systems for
measuring, reporting, and monitoring program performance. We determined the
following internal controls were relevant to our audit objective: ITG office policies,
procedures, and practices for encouraging, screening, and classifying referrals;
case acceptance criteria; and methods for monitoring and measuring performance
to stem the growth of fraudulent and abusive activity in the Indian tribal
sector. We evaluated these controls by interviewing ITG office management,
reviewing ADAPT examination inventory, reviewing the Government Performance
and Results Act of 1993, and reviewing other applicable documentation.

SUBJECT:
"Fraud and Abuse Are Addressed in the Indian Tribal
Sector, but Performance Objectives and Measures Are Needed to Assess Program
Effectiveness"

Thank you for your review of our Abuse Detection and Prevention Teams
(ADAPT) and for your suggestions for improving the program. We appreciate your
detailed observations and recommendation.

The Indian Tribal Governments Office (ITG) has the unique role of
interacting with sovereign tribal governments on federal tax matters. The
ADAPT groups specifically focus on the areas of fraud and tax avoidance schemes
in Indian Country. In this role, ADAPT receives referrals from multiple
sources, including tribal members, elected officials, employees, and tribal law
enforcement. We consider the tribes our partners in combating those abuses,
and ADAPT works along with other law enforcement, including tribal law
enforcement, to protect tribal assets from abuse or exploitation.

Your report acknowledges the progress we have made in implementing ADAPT
since your last review in 2003, and it recommends additional improvements
related to performance objectives and measures. Our response to your
recommendation is found in the attachment.

Before coming to that, however, we wish to make several observations.

The first concerns the parenthetical statement on page 6 of the report
that tribal members examined were related to 12 percent of Federally-recognized
tribes. Our experience, and the data we have seen, does not support any
implication that fraudulent or abusive schemes are more prevalent in Indian
Country than in other sectors of the population, or that tribes or their
members are the major source of those schemes.

The second concerns the definition of the term "tax module,"
discussed in the report at footnote 18. The example given relates to
individual Forms 1040 and is not illustrative of the examinations ADAPT
conducts, which are primarily examinations of entities. In that context, the
concept of a tax module for employment tax purposes would be more instructive.
One year of an employment tax exam generally involves six tax modules. Thus
the numbers in Figure 1 of the report would generally need to be divided by six
to get an estimate of the number of tax years involved. We also would like to
emphasize that the number of tax modules examined does not in any way reference
the number of tribal entities examined. It is very common for an examination
to involve multiple years on one entity. Accordingly, Figure 1 cannot be read
to relate to the number of tribal entities examined.

Our final observation is that ADAPT's work to combat tax avoidance
schemes in Indian Country is appropriate and necessary. The majority of
referrals that ADAPT accepts for examination involve business entities, rather
than individual tribal members, and the necessity of this work is shown by a
change rate in closed ADAPT examinations that is close to 100%.

Attachment

Recommendation: The Director, ITG, should develop specific
performance objectives for the ADAPT, along with associated measures, to better
assess how effectively the program is addressing fraud and abuse in the Indian
tribal sector.

Corrective Action: ITG will review the performance objectives and
associated measures in other IRS fraud-related programs to determine whether,
and at what level, similar standards can be implemented by ADAPT. To the
degree appropriate, ITG will then implement such standards.

Implementation Date: ITG will complete its review of performance
objectives and associated measures by June 30, 2013. It will complete any
subsequent implementation by September 30, 2013.

[2]
Sovereignty refers to the right of Federally recognized Indian tribes to govern
themselves.

[3]
The ITG office is a part of the IRS’s Tax Exempt and Government Entities
Division.

[4]
Generally, Federally recognized Indian tribal governments are not subject to
Federal income tax. However, tribal‑related entities are responsible for
various income, employment, and excise taxes, as well as anti-money laundering
and information reporting requirements. In addition, tribal members are
subject to income tax.

[5]Compliance checks are an important part of the
ITG office’s strategy to reduce the need for enforcement by keeping abreast of
trends that are emerging among the tax filing and payment characteristics of
tribal entities. Unlike an examination or audit, a compliance check does not
seek to determine a tax liability for any particular period; it is voluntary,
and the tribe may refuse to participate in a compliance check without penalty.

[6]
According to ITG office management, per capita distributions are payments made
to all members of a tribe or to groups of members and can be from a variety of
sources, including tribal trust assets or net revenues of gaming activity.

[7]
The rapid growth of the Indian gaming industry makes it the largest revenue
producing gaming segment in the United States economy.

[8]
A 12-consecutive-month period ending on the last day of any month, except
December. The Federal Government’s fiscal year begins on October 1 and ends
on September 30.

[9]
In FY 2004, the ADAPT consisted of one group. A second group of examiners was
added in June 2009 to handle the increased volume of fraud and abuse
referrals and to work civil fraud cases after the completion of criminal
issues. To prevent bias, civil and criminal issues cannot be worked by the
same examiners.

[10]
Although some of the work involves tax fraud, the team’s role is much more
expansive than that single issue, as it also encompasses tax shelter
activities, Title 31 abuses, and the use of tribal entities to avoid proper
reporting and oversight of transactions. In that regard, the team not only
undertakes compliance actions to remedy identified noncompliance, but it is
also charged with undertaking preventative actions to mitigate any growth in
schemes.

[14]
Enforcement results and program statistics can be reported at the national
level.

[15]
In addition, when addressing fraud and abuse issues, the work of examiners can
be extensive and very unpredictable. The examiner’s work must ensure a level
of detail and documentation to withstand review by IRS Criminal
Investigation, IRS Chief Counsel, Department of Justice staff, and the
court system. This is especially difficult with tribal entities and
individuals who may believe they are exempt from the Federal tax system.

[16]
The ITG office does not track the results of cases because it does not have a
computer system to track enforcement actions the ITG office takes or subsequent
enforcement actions taken by other functions of the IRS.

[17]
The ITG office normally performs only examinations of Indian tribal entities. However,
several large schemes were identified involving the transfer of tribal funds to
individual tribal members representing taxable income to the individual, but no
payment of tax was made. ADAPT examiners worked these cases because other
ITG office examiners were not trained to perform examinations of Forms
1040, U.S. Individual Income Tax Return.

[18] Tax modules are defined as one tax period for one tax
return. For example, an individual Form 1040 for Tax Year 2010 is one tax
module, while the same form for Tax Year 2009 is a second module.

[19]
This figure could be more than stated. We did not review all assessments for
the period because that information was not available in management reports. Instead,
we identified and discussed individual cases involving assessments, penalties,
and interest totaling more than $5 million with ADAPT management.

[20]
The IRS Appeals office is separate from and independent of the office that
completes examinations and recommends adjustments to tax returns. IRS
customers can file with the Appeals office to review proposed examination
adjustments.

[21]
Treasury Inspector General for Tax Administration, Ref. No. 2009-10-096, A
Corporate Approach Is Needed to Provide for a More Effective Tax-Exempt Fraud
Program (Jul. 2009).

[22]
Treasury Inspector General for Tax Administration, Ref. No. 2009-10-096, A
Corporate Approach Is Needed to Provide for a More Effective Tax-Exempt Fraud Program
(Jul. 2009).

[23]
Referrals can originate from the examination of a third party where there is a
financial interaction with a tribe or from other groups in the ITG office, the
National Fraud Program, Criminal Investigation, the Federal Bureau of Investigation,
the Department of the Interior, tribes and tribal members, or State departments
of gaming. Referrals can be received through telephone calls, e-mails, paper
documents, or the IRS Internet website.

[24]
Managerial approval is not required if an open examination is expanded to
include additional related entities or tax types and tax periods.

[25]Civil fraud results
in a remedial action taken by the Government such as assessing the correct tax
and imposing civil penalties as an addition to tax. Civil penalties are
assessed as a part of the tax. Criminal fraud results in a punitive action
with penalties consisting of fines and/or imprisonment. Criminal penalties are
enforced only by prosecution, are provided to punish the taxpayer for
wrongdoings, and serve as a deterrent to other taxpayers.

[26]
The Special Enforcement Program is a compliance program within the Small
Business/Self-Employed Division directed toward the segment of the population
that derives substantial income from either legal or illegal activities and
intentionally understates their tax liability.